Get Ready for a Nasty Q2!

Dear Reader,

This is where the pros are separated from the amateurs. Everybody’s a genius in a bull market, but do you have what it takes to survive and succeed when the stock market and Bitcoin are getting hammered?

Make no mistake: it’s all about bond yields now. Sure, the Russia-Ukraine crisis is a factor and could roil the financial markets for a while. There are also Covid-19-related lockdowns in China, which will undoubtedly exacerbate the supply chain issues that are contributing to inflation in the U.S.

If anything’s spooking the markets now, though, it’s the threat of the QE punch bowl being taken away this year. High-flying technology stocks, which enjoyed a decade-long bull market as the Federal Reserve pushed accommodative monetary policy to the limit, are particularly vulnerable now.

10-year U.S. Treasury yields recently hit a new three-year high, topping 2.7% and even 2.77% on Sunday evening. Yields move inversely to prices, so the prices of government bonds are getting clobbered.

Clearly, bond-market traders are anticipating what’s to come. The Fed is expected to hike interest rates at every single FOMC meeting this year as it attempts to combat historically high inflation, while also reversing QE by reducing the size of its balance sheet.

Last week, a number of Fed officials roiled the stock and crypto markets with particularly hawkish comments. On top of that, the minutes from the last Fed meeting suggested the central bank will move more aggressively to tighten monetary policy, even to the extent of implementing half-point interest-rate hikes.

As uncertainty and fear continue to weigh on the financial markets, some technology stocks with high valuation multiples could come under further pressure. Don’t be surprised if the NASDAQ underperforms defensive sectors – like health care, basic consumer goods, and utilities – for a while.

All eyes will be on key gauges of inflation. Investors will be closely watching for new data regarding the consumer price index as well as the producer price index for March. For the foreseeable future, the Fed will have the unenviable task of getting inflation under control without causing major damage to the economy.

Also throwing a wrench in the works is the start of the first-quarter earnings season. Kicking off the proceedings will be the quarterly results from major U.S. financial groups like JPMorgan, Citigroup, Morgan Stanley, Goldman Sachs, and Wells Fargo.

Meanwhile, cryptocurrencies have been strongly correlated to tech stocks – for better, or for worse. Bitcoin has trended lower, slipping below $42,000. Less than a week ago, Bitcoin was trading above $45,000.

At the same time, Ethereum is struggling to hold the crucial $3,000 level. However, we don’t believe that the correlation between cryptocurrencies and technology stocks will persist for the long term.

Instead, we’re looking to take advantage of short-term trades in Bitcoin and Ethereum as the markets will only correlate crypto and tech stocks for so long. Cryptocurrency hasn’t historically moved inversely with bond yields, so the current correlation should be temporary.

With this in mind, investors can take advantage of short-term opportunities as they present themselves. After all, Bitcoin and Ethereum are meant to thrive during high-inflation periods – and if the markets forget this temporarily, that’s your chance to place a nearly perfect trade.